Federal Reserve Chairman Jerome Powell during a press conference following a Federal Open Market Committee (FOMC) meeting on Wednesday, October 29, 2025 in Washington, DC, USA.
Al Drago | Bloomberg | Getty Images
In his final months as head of the all-powerful US Federal Reserve, Federal Reserve Chairman Jerome Powell is facing perhaps the most difficult challenge of his term in office, but certainly the most difficult.
After his surprisingly tough speech on Wednesday about the possibility of another rate cut in December, Powell must navigate a suddenly contentious atmosphere among policymakers that will shape what direction the Fed takes.
While this is not the existential economic threat posed by the Covid pandemic in 2020, it does indicate a level of danger unusual for the institution.
“December could be chaotic,” Bank of America economist Aditya Bhave said in a note to clients. “We still expect that the Fed, under Chairman Powell, will not cut rates again. But unless the data provides a clear signal in one direction or the other, the decision will likely be even more contentious in December than it was in October.”
The Fed approved a widely expected quarter-percentage point rate cut on Wednesday, bringing the key interest rate to between 3.75% and 4%. However, Powell warned that another cut in December was “not a given,” something the market had not expected.
While Wall Street economists and strategists were divided over whether the committee will actually approve another cut at the Dec. 9-10 meeting, they agreed that this is a defining moment for Powell and the legacy he will ultimately leave behind when his term expires in May.
“Even in a situation without much additional data due to the shutdown, it may actually make sense to act against market prices to maintain the option going forward,” wrote Michael Gapen, chief U.S. economist at Morgan Stanley. “A 95% probability attributed to a rate cut in December seems inconsistent with a data-dependent Fed.”
Markets react
For their part, traders didn't buy the restrictive rhetoric. According to CME Group's FedWatch, Fed Fund futures pricing on Thursday still suggested a 75% chance of a rate cut in December, although it was around 90% the day before.
But Powell went to great lengths in his Wednesday post-meeting news conference to dispel the notion that the cut, which would be the third since September, was a slam dunk.
The thrust of his argument was complex: data available during the government shutdown largely showed a stable economy, although the labor market remains at risk; inflation is still above target; And in an unusual development, there are “vastly different” views on the FOMC about where policy should move.
The markets were obviously surprised by this development, with share prices falling and government bond yields rising. The 10-year Treasury yield was well above 4% on Thursday, while the policy-sensitive 2-year Treasury note climbed over 3.6% to its highest level in about a month.
“The bond market's reaction should certainly give Fed officials pause,” wrote Ed Yardeni, head of Yardeni Research and inventor of the term “bond watchdog” to describe buyer strikes in bond markets. “The bond market isn’t buying the Fed’s cover story that interest rates are too restrictive.”
For Powell, the December statement was an unusual move as markets had expected a more neutral tone. Asked whether he was bothered by strong expectations of another cut, Powell said markets should “take note” of his statement that a cut was “not a given.”
“You have to be right in front of that because you don't want to surprise the market a few weeks later. Now is the time to do it,” said Dan North, lead North America economist at Allianz Trade. “He doesn't normally use words quite so forcefully. So that was interesting, and he's obviously trying to quell speculation about December. We feel the same way, December will be a lull.”
Political overhang
The developments come at a sensitive time for the Fed.
Powell, a popular target of criticism from President Donald Trump, only has about seven months left in his term. Finance Secretary Scott Bessent has been busy interviewing potential successors — including current governors Christopher Waller and Michelle Bowman, both of whom voted for the cut.
Additionally, Gov. Stephen Miran, a hand-picked Trump nominee who will only serve until January, objected to the vote again, supporting it by half a point.
At the other end of the spectrum, Kansas City Fed President Jeffrey Schmid also voted “no,” but because he did not want to cut interest rates. There is a range of views between them on the normally consensus-oriented FOMC.
Whether Powell's tipping the hat to the doves simply reflects politeness or deeper concerns about the cuts will be central to the Fed's analysis in the coming weeks.
“Although the press conference was slightly different than expected, we have not changed our Fed forecast and continue to view a rate cut in December as highly likely,” wrote David Mericle, an economist at Goldman Sachs. “We suspect that there is significant resistance to the risk management cuts in the FOMC and that Powell felt it was important to express the concerns of other participants in his press conference today. However, we still believe the case for a December cut remains strong.”